How to Lower or Limit Tax When Selling a Silicon Valley Home
It’s human nature to pay as little as possible for a desired item, especially when it comes to paying taxes on the sale of real estate, whether a home or investment property.
On every estimated seller net sheet I provide, there is an important disclosure at the bottom of the page. “*Estimate is based on reliable information and data but is not guaranteed. Principals to verify tax and legal consequences of buying and selling Real Estate prior to signing a contract.”
As of April 18, 2019, my understanding of the real estate tax law still shows the following benefits below are valid and available to Santa Clara County home sellers in California.
Primary Residence Benefits
1 U.S. Citizen Capital Gains Benefit
A Seller can keep up to $250,000 per person and up to $500,000 per married couple tax-free when selling a primary residence that was lived in by the principal(s) for at least 2 years (or any 24 months) of the past 5 years (or past 60 months).
This Benefit can currently be used repeatedly in sequence. For example, if a qualifying couple lived in a home from January 1, 2015 to January 1, 2017 and sold that home in January 2017 and kept up to $500,000 tax free, they could repeat the process as early as two years later in January 2019. However, the property may not have gained the full $500,000 in such a short time.
Again, the couple must qualify by living in the property for at least 24 of the past 60 months as their primary residence. Tax records should reflect these facts, should there later be an audit.
2 California Senior Transfer Tax Basis Benefit
Courtesy of Propositions 60 and 90, Seniors over age 55 can sell a primary residence and transfer that low tax basis to another primary residence located within Santa Clara County or any of the current 10 participating counties in California. Participating counties are: Alameda, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolemne and Ventura.
There are certain restrictions, such as this can only be used once in a person’s lifetime. There is a fee of $110 for the transfer. To get questions answered, call 408-299-5300.
Investment Property Benefits
1 Tax-Deferred 1031 Exchange
In a Tax-Deferred 1031 Exchange an investment property may be sold for a like-kind property (e.g. real estate for real estate) and the taxes deferred until the property is sold or upon death of the principals.
There are special caveats. In addition to the traditional escrow company, there must also be an exchange company that holds all of the sale proceeds, proving (in case of any audit) that the seller never “touched” any of the money.
Also the Seller only has 45 days from closing of the sale to notify and identify in writing their intent to purchase 1 of 3 properties. Only 3 possible properties may be identified. Should Seller fail to purchase one of the 3 identified properties, the exchange is “dead” and taxes are due.
There are additional tax-deferring or sometimes tax-eliminating instruments that tax, investment and financial planning companies promote. Those include:
Installment Sale Trust
Charitable Remainder Trust
Loan on Proceeds
Exchanges into Opportunity Zone Property
Any person considering buying, selling or investing in real estate is advised to consult tax and legal professionals to determine the financial impact of any real estate transaction, as well as the use of any of the abovementioned tax vehicles or strategies for their exact situation.
Many tax and legal professionals will provide a free 30-minute consultation when requested in advance. To maximize the efficiency of the consultation time, principals are advised to prepare a synopsis of their current situation and what action(s) they are considering.
Helpful tax publications:
California Specific Benefits
California State Board of Equalization Answers on Proposition 60 and 90
Which California Counties Accept Proposition 60 and 90 tax transfers
Thanks for reading “How to Lower or Limit Tax When Selling a Silicon Valley Home”.